Turk: Central Banks Losing War On Gold

January 15, 2013

HAI: When you say central banks lend it, to whom would they lend it?

Turk: Well, they lend it to bullion banks, which in turn lend it to various fabricators. The fabricators turn it into bars, coins, high-karat jewelry and disburse it to millions of people around the globe. That’s why you have to assume this gold is never going to come back to the central banks. Let’s put some numbers behind it in order to put it into perspective.

Central banks say they own about 30,000 tonnes of gold. The above-ground stock of gold is approximately 156,000 tonnes of gold. Now, the reality is that central banks probably own no more than 15,000 tonnes of gold and it could very well be less than that. The rest of that gold, or 141,000 tonnes, is held by countless individuals and institutions around the globe.

HAI: What would you say to an investor, rubbing his chin, saying to himself, “Should I buy bullion or a gold-backed ETF or both?”

Turk: The investor first has to ask himself why he is buying bullion in the first place. Why does he want bullion in his portfolio? Does he want to trade bullion in order to gain some exposure to the gold price, and try to profit from ups or downs in the fluctuations of the gold price? Or, is he looking for a bedrock asset that doesn’t have counterparty risk, and puts wealth outside the monetary and banking system today?

Now, if you're a trader, products like an ETF, futures contracts, options—all of those things, they're the right tool for that particular job. But if your objective is to get a safe haven with no counterparty risk, again, you have to get the right tool for the job, which is to own physical metal, because only physical metal avoids counterparty risk. So it’s really just using the right tool for the right job. And every individual has to ask what they want to accomplish by having exposure to gold.

HAI: What would it cost to store $10,000 of gold in your vault?

Turk: The annual storage fee is 15 to 18 basis points, which is less cost than the typical gold ETF.

HAI: How have physically backed gold ETFs impacted the gold market’s supply and demand equation?

Turk: It provides people with more exposure to the gold price. But if you actually do a correlation between the weight of gold in the ETF and gold prices, over long periods of time, there is little correlation. Sometimes you’ll see the gold price going up, with no changes in the weight of metal going into the ETF. And you’ll see other periods of time when there's weight of metal going into the ETF, and there is no change in the gold price.

HAI: When we talked earlier last year, you favored silver over gold. Do you still feel that there's a better upside to silver?

Turk: I do. Gold was up 7 percent last year, and silver was up 8.2 percent. So it has outperformed. I expect silver to continue to outperform. However, silver has greater risk because of the extra volatility. The way I describe it is that if owning gold is like flying in a 747, silver is like flying in an F-16. That volatility is not for everybody. But higher risk typically means a higher return. So I expect silver to outperform going forward.


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